The effective tax administration (ETA) offer in compromise (OIC) is not usually the first type of offer in compromise that is discussed when trying to settle a tax debt. More often than not it is the doubt as to collectibility OIC that taxpayers consider. They may also have a reasonable case to move forward with a doubt as to liability OIC to show they should not have been assessed the tax liability in the first place. Though these are more common, they may not address every taxpayer’s situation. So, a third option that can be utilized when extenuating circumstances exist is the ETA offer in compromise.
What is an ETA OIC?
According to Treasury Regulation (“Treas. Reg.”) § 301.7122-1(c)(3), offers in compromise to promote effective tax administration are used when factors supporting (but not conclusive of) a determination that collection would cause economic hardship. Now, in layman’s terms this is stating ETA OICs are available when it would be inequitable for the taxpayer to pay the taxes because doing so would create a further economic hardship. ETA OICs can also encompass cases regarding non-economic hardship factors like public policy and equity factors, which will be discussed later.
ETA OIC to consider economic hardship
Economic hardship is defined in Treas. Reg. § 301.6343-1(b)(4) as collection action, such as a levy, that is creating a financial hardship due to the financial condition of the taxpayer and does not allow them to pay for their reasonable basic living expenses. In addition to the basic living expenses of a taxpayer being considered to determine economic hardship, the Internal Revenue Manual (“IRM”) § 5.8.11.2.1 lists these factors that should be considered when reviewing an ETA OIC:
- The taxpayer’s age and employment status
- Number, age, and health of a taxpayer’s dependents
- The cost of living for the area in which the taxpayer resides
- Extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster
Examples of when an ETA OIC may be applicable are:
1) The taxpayer has a long term illness, disability, or medical condition that will cause their financial resources to be depleted during the course of supporting and caring for themselves.
2) The taxpayer has monthly income but, the income is exhausted each month to provide care for dependents that do not have a means to support themselves.
3) The taxpayer has assets where the equity is unable to be borrowed against and the liquidating of those assets to pay the tax debt would not allow the taxpayer to pay for basic living expenses.
These are just a few examples of when an ETA OIC would be applicable and provides guidelines to the types of circumstances where an ETA OIC would be applicable. In addition to all of the above factors, an ETA OIC can only be considered by the IRS after they have determined that the taxpayer does not qualify for a doubt as to collectibility or doubt as to liability OIC. This means that you can submit an ETA OIC right away but, the IRS will review the OIC to determine if it can be resolved through a doubt as to collectibility or doubt as to liability OIC first.
Public policy, equity grounds, or compelling equity factors ETA OICs
These types of ETA OICs are not based on whether an economic hardship would be caused if the debt were not compromised. ETA OICs that are accepted based on public policy, equity grounds, or compelling equity factors are rare but, that does not mean they do no not have a place in the tax law. Just because a situation rarely occurs does not mean that you cannot have a means to address it. So, in this section we will go over scenarios that address these types of situations.
First, in order to qualify under these circumstances there are certain factors that must be met.
- The taxpayer must have remained in compliance since the liability was incurred.
- The taxpayer must have acted reasonably and responsibly during the situation that caused the tax debt.
- If the tax debt is compromised the taxpayer will not be in a better position than if they had timely and fully met their obligations, unless special circumstances justify the compromise.
The acceptance of these ETA OICs must be fair, equitable, and promote effective tax administration. A taxpayer who can provide evidence that public confidence in the tax laws being administered in a fair and equitable manner would be undermined if the tax debt is not settled would justify that taxpayer in submitting an ETA OIC. However, this evidence must be compelling enough to cause the IRS to shift it’s position on the matter, which can be extremely difficult.
ETA OICs may also be accepted on the grounds that the tax debt was actually caused due to a processing error of the IRS and the tax debt would not have existed otherwise. In other words, the IRS made a mistake and is willing to settle the tax debt because it was their mistake.
Another reason, that ties closely to the one above, is that the taxpayer incurred a tax debt based on erroneous instructions or guidance from the IRS. In this scenario, the taxpayer would not have otherwise incurred the tax debt had they not followed the erroneous instructions or guidance of the IRS. However, the taxpayer must also be able to show that the instruction or guidance provided to them was in fact from the IRS and not another source.
If the IRS unreasonably delayed the resolution of a taxpayer’s case and it caused them to incur additional penalties and interest, an ETA OIC would be a possible resolution. In this scenario, attempting to abate the penalties and interest must be done first.
One scenario that many people deal with each year is experiencing a criminal or fraudulent act committed by a third party. If this act caused the taxpayer to incur a tax debt, the taxpayer must prove that this was indeed the cause of the tax debt and provide this information when submitting their ETA OIC.
An ETA OIC may also be considered by the IRS if the taxpayer can prove that if the tax debt were to be collected in full it would adversely impact the community in which the taxpayer lives or does business. This would be in the case where the taxpayer or their business provides essential services to the community. Generally, the types of businesses that qualify under these circumstances are non-profit, charitable, or exempt organizations.
Finally, if a taxpayer was incapacitated and was unable to comply with the tax laws the taxpayer may be able to submit an ETA OIC. In this circumstance, a taxpayer is actually given a chance to first assess the situation along with the IRS to correctly sort the matter out first before moving forward with the ETA OIC. This would mean making sure tax returns are properly filed, balances are properly assessed, and adjusting the overall accounting of the taxpayer. After this has been completed or if the taxpayer is unable to accurately correct these issues, the IRS will then consider accepting the ETA OIC based on the grounds that their is evidence that the amount due is incorrect but there isn’t a way to accurately calculate the exact amount.
Conclusion
ETA OICs can be an alternative for some taxpayers when a doubt as to collectibility or doubt as to liability OIC is not an option. These types of offers are not based on a specific set of rules, only guidelines, and each case is evaluated by the IRS based on its unique set of facts. Those facts could pertain to a possible economic hardship or extenuating circumstances not surrounding an economic hardship. These types of offers are difficult to have accepted because it requires building a strong argument for your case to be accepted. Speaking with a tax professional is highly recommended when determining if the ETA OIC is the right option for you.
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- What You Need To Know Before Submitting a Doubt As To Liability OIC
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